I received a call from a really sweet, very well intentioned young lady the other day who was all excited about the possibilities of buying a foreclosure very cheaply. She had been trolling through one of the 8 million Foreclosures R Us websites and had found several deals that had fired her up. According to her, there was a 4 bedroom, 3 bath house on Halsey in Foster City that she could get for $26,819. If that didn’t come through she was also interested in a 3 bedroom, 2 bath house on Laguna in Burlingame for $12,227 or another house on Ribbon in Foster City for $14,707. Honestly, I’m really not sure what these amounts represent…mostly because I didn’t want to pay the $39.95 required to get more information, but I’m reasonably sure that neither this young lady, or me…or you for that matter, is going to buy one of these houses for those prices.

My suspicion is that we’re seeing a default number on something other than a first loan. Maybe it’s a small second that a homeowner is behind on…heck, for all I know it’s a car loan in default! I just know that in this area people are not buying houses at 1965 era prices. We chatted some more about this topic and inevitably I asked her if she had spoke to a lender about getting a loan…she had not. Turns out both she and her husband have jobs that are basically off the books. He’s a handy man and she walks dogs. They filed bankruptcy 5 years ago and she said they’re about to make their last payment to the IRS clearing them of a debt there too. If necessary they could probably come up with $10,000 for a down payment…as a gift. I hope it doesn’t sound like, in any way, like I’m making fun of these folks. She was sincere and really wanted to get on track. I offered to meet with them and help them create a gameplan that might pay off for them some time in the future, but it’s not going to be now.

It occured to me that just a few years ago there were lenders that probably would have given them a home loan. Stated income, zero down, sub-prime. It would have buried them then like it would bury them now. I don’t believe in get rich quick schemes. If you’re thinking about buying, spend plenty of time and energy creating a financial plan that will allow you to actually afford the home you’ll be buying and forget about the phantom $25,000 4 bedroom home in Foster City.

In the “never a dull moment” world of lending it sure seems like the programs offered, along with the criteria expected, changes every week. In fact, the criteria has gotten signifcantly tighter. Maybe the most significant area among these changes are the minimum down payments lenders are now requiring before they’ll give you a loan. For many lenders those minimums are now 15% and some are even 20%.  Long gone are the zero down, stated income, days of the past! 5% down deals were not uncommon last year and I had several sales this year where the buyers had 10% down but those options have shrunk considerably as 2008 has progressed. You can still buy with less down, several lenders offer FHA backed loans that will allow 3% down, until the end of this year, but there’s alot of hoops to jump through to get them. If you’re a lender don’t hesitate to comment about your lower down programs. My point though, is that the chances are that to get a really good loan product you’re most likely going to need more cash going in.

If you’re moving up from an existing residence the chances are pretty good that your down payment is coming from that source but in many other cases, and especially with first time buyers, acquiring a 15% down payment around here could pose a bit of a challenge. A typical first time buyer in Foster City is going to be looking for a condo or townhouse and the median price for one of those right now is $552,000…thus a down payment of at least $82,800 will be needed. Certainly, there are plenty of folks who are good savers and plenty of others who have great options but there’s also many out there who’re going to feel like it’ll be years until they can save up enough to make this crazy dream work. For those folks, here’s my advice: Ask for help.

I can’t tell you how many first time buyers I’ve worked with who have been in that position yet have been either absolutely terrified of asking for help or are adamantly opposed to it. When Lesley and I bought our first house we, too, were terrified. The thought of asking my parents for help was horrific! I wanted to prove something to them, after all, plus I was certain they would say no. I was wrong…both of our families turned out to be highly supportive and we couldn’t have done it without them. I had clients a couple of years ago whose entire immediate family raised $1.2 million in cash so it would be easier for them to compete in a multiple offer frenzied environment. After they bought they refinanced and paid the family back. I had a client who is the pastor of a church whose congregation raised money for their down payment so they could buy a home, and I also had some clients who casually mentioned to a group of friends at dinner one night that they were considering moving out of the Bay Area so that they could buy a house…and discovered that a few weeks later their friends had formed an investment group who put in $350,000 so that this family could buy and stay here. All this because somebody asked for help. I’ve also seen clients that I worked with 10 years ago, when the median price of a single family house in Foster City was $500,000, continue to rent to this day because they refused adamantly to ask family for help…it wasn’t that they asked and were rejected, they just wouldn’t ask. I don’t know why I was so uncomfortable with the thought of asking my family for help with our down payment…I really look forward to the day when my daughters come to me and ask for assistance. What a privilege it will be to help them!

I was at the Title company today to sign papers with my clients who are selling their Foster City townhouse when our escrow officer informed us that of the five files on his desk ours was the only one that the loan documents had come in on time…and thus we were on schedule to close on time next week. The other files he had were due to have closed either earlier this week or last week and were still awaiting the arrival of those precious docs. I had to laugh because I thought it was only my deals this year that had gone completely haywire from a timing standpoint! Why, you ask? The reason is because the lenders right now have become really, really strict when it comes to their guidelines. I actually had a transaction last month that was delayed almost two weeks and one of the reasons was that the buyers were $178.00 short on their cash reserves and the lender’s underwriter was uncomfortable drawing the loan docs if they were in any kind of a negative situation. $178.00. On a $700,000 loan. I actually put $200.00, of my own money, in my buyer’s savings account to put them in the black. The underwriter asked for a copy of the receipt! Needless to say, the easy, breezy days of zero down and stated income loans are over…the pendulum has swung pretty far in the other direction. Many lenders right now are back to requiring 20% (or more) down.

There are other loan products available but here’s an obvious fact, for the time being you’ll need to really have your ducks in a row if you’re buying right now. For quite awhile almost everybody could go from the idea stage to closing in a relatively short amount of time. If you’re thinking of buying now you really need to have, and work, a plan. You have to have an adequate down payment (and it needs to be your own money). You have to have a good credit score. You need adequate cash reserves and your debt to income ratio has to conform to lender’s standards…which actually keep getting tighter.

All of this is good too! We desperately needed to get back to some form of sanity. It’s OK if you can’t buy a property for 6 months or more. If you’re ducks are actually in a row you’ll find it much easier to handle that mortgage payment. If you’re kicking around the idea of buying, even if that involves a move up and the sale of a property it’s a must to spend plenty of time with a mortgage professional to create a successful game-plan. Once you do that you’ll greatly reduce the stress of the escrow process and close on time.

As you’ve undoubtedly been made aware, Congress has passed an economic stimulus package that, among other things gives checks for $600.00 to many individuals and $1200.00 to many couples. This story got lots of press last week and was signed by the President earlier today. What seemed to have gotten lost a bit in this package, at least as far as I was concerned, was the much larger issue of the Fed raising the conforming loan limits.

Starting in 1970 Fannie Mae was authorized by the United States government to purchase residential mortgages. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would become known as conforming loans. Because these loans are insured by these agencies and are repackaged into the secondary mortgage market it makes the demand for them to be greater than non-conforming loans. The limit for these loans has been $417,000 and because of our very pricey area a huge number of loans given here are Jumbo loans…meaning anything over $417,000. Since the “Mortgage Meltdown” last summer it’s been very difficult for lenders to package and sell Jumbo loans and thus Jumbo loans have been more expensive to get.

Inside the stimulus package is a provision to raise the $417,000 limit to a level of $729,000 in Foster City and other Bay Area communities. This will allow many people to refinance and/or purchase homes with a significantly better interest rate and should really stimulate our market. The increase will only be available for 1 year.

Several steps must occur before these loans will be available to us including:

1. Fannie Mae & Freddie Mac must assess their internal impact to determine the delivery approach the will require of mortgage lenders and investors.

2. They must then communicate these requirements to mortgage lenders and investors.

Bottom line…it’s going to take awhile for this bureaucracy to swing into action. Here’s some other things to consider:

These increases are temporary.

The $729,000 loan limit is not nationwide, it’s going to be available here but if you have investment property outside of the Bay Area the limit will probably be lower there.

The lending environment that will surround these new conforming loans will still not resemble the market of a few years ago in that the lenders requirements are going to be stricter. We still won’t be seeing zero down, stated income subprime loans…and that’s a good thing! It’s a good idea to talk to your lender and get more details on how this program will affect you. I think it’s going to be a big benefit for everyone in Foster City.